Frontier -- Economy Watch
Pop Goes the Diesel
Rising gas prices are brutal on small business. How do you squeeze margins that are already pinched?
They weigh 43,000 pounds and can hold two dump trucks' worth of industrial mess: slag from oil refineries, algae from the cooling tanks of nuclear power plants, spilled grain from rail yards. Not surprisingly, the brawny vacuum trucks, aptly named Supersuckers, eat through 100 gallons of fuel a day.
So when diesel prices shot up 28% earlier this year, Chuck Mott, who owns three Supersuckers, had to choose: raise rates and risk losing customers, or absorb the costs and watch profits erode. He struck a compromise, adding a 5% surcharge to the daily fee for industrial cleaning--a move he says will "barely cover" the additional costs. "You have to be careful," says Mott, owner of Innovative Vacuum Services Inc., a 30-person company in Edmonds, Wash. "There's only so much you can increase prices."
Thousands of small businesses are in a similar bind. Although fuel prices have dipped somewhat since their early summer highs, regular unleaded gas remains 29% higher than a year ago, and diesel is 26% higher.
While many companies are discovering a newfound ability to pass along rising costs (page F10), others are being squeezed tighter than ever. Among the hardest-hit: small trucking companies. Most operate on razor-thin profit margins. With the added diesel costs, they're just breaking even, says Erik Madsen, owner of Madsen Trucking in Seattle. Madsen has added surcharges of 3% to 5% to some deliveries. But across-the-board hikes are out of the question, unless his larger competitors act first. "The loyalty's not there," Madsen says of his customers.
High fuel prices tend to hit small companies much harder than large ones, which have lower per-unit shipping costs, says Thomas A. Gray, who runs the Center for Small Business Studies, a Washington-based consultancy. Gray says higher fuel costs will shave 1% to 2% from most small businesses' yearend profits.
Chicago florist Gary Gudino is braced for the hit. Despite cost hikes as high as $500 a week, he doesn't dare raise prices. Instead, he's hoping that higher sales volumes around the holidays will make up for the added expenses now.
Relief could be on the way. As OPEC increases production, the average price of unleaded should drop 10 cents to 20 cents a gallon over the next year, predicts Banc of America Securities analyst Tyler Dann. But diesel and heating oil prices could remain volatile. If that happens, Mott says he'll raise prices 3% or 4%. Then he'll turn to yet another problem: hiring enough drivers to keep his Supersuckers on the road.For more on the impact of fuel costs, click Online Extras at frontier.businessweek.comBy Julie Fields